GMG Capital Investments, LLC, et al. v. Athenian Venture Partners I, L.P., et al., Nos. 514, 2010 & 614, 2010 (Del. Jan. 3, 2012)

In this en bancmemorandum opinion, the Delaware Supreme Court reversed the Delaware Superior Court’s grant of summary judgment to plaintiffs in a dispute over the remedy available to plaintiffs in the event of a breach of the contract at issue.  Whereas the Superior Court had adopted plaintiffs’ interpretation as the only reasonable interpretation of the contract, the Supreme Court found both sides’ interpretations reasonable and therefore held that the contract was ambiguous and summary judgment inappropriate.  The Supreme Court also reversed an award of attorneys’ fees, costs, and expenses pursuant to a contractual provision and remanded to the Superior Court for further proceedings.

This appeal arose out of a breach of contract action by the plaintiffs, Athenian Venture Partners I, L.P. and Athenian Venture Partners II, L.P. (together “Athenian”) against the defendants, GMG Capital Investments, LLC, GMG Capital Partners III, L.P., GMG Capital Partners III Companion Fund, L.P., and GMS Capital Partners II, L.P. (together “GMG”).  Athenian sought both a declaration that GMG breached the contract and money damages for that breach.

In 1999, both GMG and Athenian had invested in Alloptic, Inc. (“Alloptic”), a start-up technology company.  During the initial rounds of financing, GMG and Athenian had become Alloptic’s two largest equity holders.  By 2005, Alloptic was suffering financially and unable to obtain financing from new or existing investors due to a downturn in the venture capital market.  GMG approached the private equity firm Ritchie Capital Management (“Ritchie”) to discuss a potential investment in Alloptic.  Ritchie agreed to make an investment conditioned on its right to appoint Alloptic’s board of directors.  This condition required GMG and Athenian to relinquish their board seats, a consequence that Athenian initially found unacceptable.  GMG was nonetheless able to negotiate an agreement with Athenian so that GMG could offer Athenian’s board seat to Ritchie.

This agreement (the “Agreement”), which involved the exchange of Athenian’s Alloptic stock for the opportunity to participate in GMG’s favorable liquidation rights, was memorialized in four documents:  a term sheet, a letter agreement, a limited recourse note (the “Note”), and a pledge agreement (the “Pledge Agreement”).  Under the Agreement, Athenian pledged its Alloptic stock in exchange for the Note, whose principal amount was $6,000,000.  Athenian’s Alloptic stock was then placed in escrow along with all of GMG’s Alloptic stock.  Under the Pledge Agreement, Athenian was limited to the pledged Alloptic stock (the “Pledged Securities”) as its “sole remedy” in the event of a breach of GMG’s obligations.  Under one provision in the Note, GMG was obligated to make monthly payments of $15,000 in principal on the Note to Athenian (the “Mandatory Payments”) if one of two triggering events occurred. 

A triggering event occurred in January 2008 and GMG did not make the Mandatory Payments to Athenian.  Athenian brought suit in the Delaware Superior Court seeking monetary damages for the Mandatory Payments GMG did not make and a declaration that GMG was obligated to continue to make the Mandatory Payments until the entire principal of the Note was paid.  The parties did not dispute that the Agreement was breached, but disagreed over Athenian’s remedy for the breach.  GMG contended that under the Pledge Agreement, Athenian’s sole remedy was recourse to the Pledged Securities.  Athenian contended that the Agreement permitted an election of remedies, including money damages for failure to make the Mandatory Payments, which Athenian contended were carved out of the “sole remedy” provision in the Pledge Agreement.  Athenian also sought an award of attorneys’ fees, costs, and expenses pursuant to a fee-shifting provision contained in the Agreement.

The Superior Court held that Athenian was entitled to summary judgment, reasoning that Athenian’s interpretation of the Agreement’s remedies provisions was the only reasonable interpretation.  Because Athenian had prevailed on its summary judgment motion, the Superior Court also awarded Athenian its attorneys’ fees, costs, and expenses pursuant to the Agreement.

The Delaware Supreme Court reversed, reasoning that the Agreement was ambiguous because both GMG’s and Athenian’s interpretations of the Agreement were reasonable.  As to GMG’s interpretation, the Court explained that the “sole remedy” provision could be read to limit Athenian’s recourse to the Pledged Securities because the Mandatory Payments provision could be viewed only as a contractual obligation and not also as a remedy for breach of that obligation.  As to Athenian’s interpretation, the Court explained that the Mandatory Payments provision could be read to be excepted from the limited recourse nature of the Note and that Athenian could be permitted an election of remedies, including money damages for failure to make the Mandatory Payments.  The Court further reasoned that where contractual language is ambiguous, summary judgment is improper because a material factual dispute necessarily results that requires the factfinder to consider admissible extrinsic evidence as to the proper interpretation. 

The Court also reversed the Superior Court’s award of attorneys’ fees, costs, and expenses because that order was dependent upon the summary judgment order.  The case was remanded to the Superior Court for further proceedings. 

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